US Supreme Court holds that severance payments are subject to FICA withholding

The long procedural history of United States v. Quality Stores finally ended on March 25, 2014, when the Supreme Court held that severance payments paid by Quality Stores in connection with a “reduction in force,” were subject to FICA taxes. Prior to reaching the Supreme Court, the decision had been decided in favor of Quality Stores by the Bankruptcy Court, a US District Court and the Sixth Circuit Court of Appeals.

The narrow question at issue was whether severance payments paid in connection with an employer’s workforce reduction (“SUB” payments) were considered wages for purposes of FICA taxes. Quality Stores had been successful in arguing that the income tax withholding statute’s provision that SUB payments be treated as if (emphasis added) they were wages proved that such payments were not wages for FICA withholding purposes. The Court rejected that argument, holding that such phrase was designed to imply only that a certain class of SUB payments were not otherwise considered wages; that the “as if” language did not extend to all types of SUB payments, including the ones at issue.

Following the lower courts’ decisions in favor of Quality Stores, many taxpayers filed protective refund claims with respect to FICA withheld and paid in connection with their SUB payments. Most taxpayers received notices from the IRS that the FICA refund claims review was suspended until there was a final judicial determination in the Quality Stores case. Given that the Supreme Court has the last word on the subject, it is expected that the IRS will now formally reject all SUB payment FICA tax refund claims.


Although the Court’s decision puts to rest any question about the FICA taxability of SUB severance payments, the Court’s decision rightfully pointed out that the FICA tax statute contains numerous exceptions to the definition of wages for FICA purposes. For instance, amounts paid on account of an employee’s sickness, death or disability are not subject to FICA taxes, nor are payments made to the survivor or estate of a former employee. Thus, companies are encouraged to review unusual types of payments made to determine if FICA taxes were erroneously withheld and paid, such that the company (and employee) is entitled to a refund.

For more information on this topic, or to learn how Baker Tilly tax specialists can help, contact our team.

Related sections

Conference room in advance of a board meeting
Next up

Enhancing board governance